Dairy Outlook, December 2013
By Jim Dunn, Professor of Agricultural Economics, Penn State University
The CME block cheese price fell by 1.6% in the last month, ending 3¢/lb. lower a $1.87/lb. The price fell sharply in early November, only to rise steadily throughout the rest of November, spiking at $1.9475 on December 4, before settling back to its present level on November 1. This early weakness was a response to a 2.3% increase in the September report on Cheese production, but the market seems to have realized that the demand side was still strong enough to justify the price being around $1.85. Seasonal usage is always high and exports continue to be strong. CME butter prices rose by 6.4%, or 10¢ in the past month. Export demand is still strong, and like cheese, butter markets are buoyed by the high usage over the holidays. Skim milk powder continues to rise, rising another 5% since last month. China is buying a lot of powder. China is considering a change in its long-standing one-child policy, which would certainly increase the need for dry-milk products. Chinese milk production is also down. Dry whey prices rose 2% to $0.5525/lb.
Table 1 lists some past and estimated future milk prices. The November Pennsylvania all-milk price was $0.23 higher than October at $22.50/cwt. The November Class III price was $0.61 higher than in October at $18.83/cwt. The Class III futures price for December is $19.11. Average Class III futures prices for the first half of 2014 are up about one dollar from last month at $17.91. My hypothesis is that the small increase in the latest milk production report gave market participants a sense that with the strong butter demand, cheese production will remain moderate. The November Class IV price was up $0.35/cwt. from October at $20.52/cwt. The Class IV futures price for December is $21.44. The prices of Class IV futures average $20.88/cwt. for the first half of 2014, up over $2.00/cwt. from last month, riding the surge of strength in butter and powder markets. Based on the futures prices, the forecast PA all-milk prices for 2013 and the first six months of 2014 are also shown in Table 1. The forecast all-milk prices for the first half of 2014 are above the corresponding values from 2013, which given the lower feed prices is positive for dairy farmers.
The U.S. dollar is mixed in the past month against the Australian and the New Zealand dollars and down against the Euro. Being down against the Australian and New Zealand dollars is especially important for the Asia trade, which is carrying the high dairy prices now.
Corn and Soybean Markets
Corn has remained low, but soybeans and soybean meal have risen recently. Corn and beans have moved in opposite directions, in part because of export problems in Brazil and Argentina. If corn and bean prices stay as far apart as they are now, 2014 will see a big shift in acreage from corn to beans. This shift will be supported by rotation reasons. In any case, the lower corn prices have helped feed prices remain low, despite little change in the other feed components.
Income over Feed Costs (IOFC)
Penn State's measure of income over feed costs rose by 3.7% in November. This is an increase of 36¢/cow/day. The November value is $9.91/cow/day, the highest value for several years. The increases in November are mainly because of a higher milk price, which rose by 2.3% from October levels. Pennsylvania corn prices are down once again from $4.15 to $4.02 per bushel, but hay prices rose 3%. The soybean meal price fell by 8.7%. The November PA all-milk price rose by $0.50 from October to $22.50/cwt. The cost of feeding a cow fell by 3¢/day to $4.72. Income over feed cost reflects daily gross milk income less feed costs for an average cow producing 65 pounds of milk per day. Figure 1 and Table 2 showing the monthly data are appended.
The allocation of the revenue per hundred pounds of milk is shown in Table 3. The milk margin is the estimated amount from the Pennsylvania all milk price that remains after feed costs are paid. As does income over feed cost, this measure shows that the November PA milk margin was 3.7% higher than October.
As can be seen in Figure 2, milk production for October was 1% more than the previous year. This was about the same increase of September over September 2012. Given the drop in feed costs as the new crops became available, this is a very small increase. The number of dairy cows is shown in Figure 3. The October cow numbers are 0.1% above the October 2012 value, which is not an issue, and cow numbers are declining for the last three months, which is significant. This decrease is despite the continuing high milk prices and the lower feed costs as the 2013 corn and soybean crops are being harvested. Despite the better measure of income over feed costs here in the East, the high hay and meal prices have meant that western producers are not facing the same improvements is income over feed costs.